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Friday, January 9, 2009

Fixed Rate Possibly Better than Adjustable in Reverse Biz

By Matt Vanrock

At this time last year, if a senior was to ask me which was a wiser option, the fixed interest rate or the one that adjusts, my response to him would (in almost all cases) have been the latter.

Cut to the present and that isn't so much the case anymore. This is because the banks dealing in reverse mortgages keep striving to increase their take on the deal.

The margin that banks and their investors needed was at approximately 1% at this time last year. Go ahead and liken the "margin" to "profit margin". It is the profit in the loan.

To help you understand in a real life example. Let's say a year ago a borrower used an ARM with it's index equaling 1%. The lender adds on 1% for its margin. Add the two together and you arrive at an actual interest rate of two percent.

Well, margins are on the rise since this time last year. By March they went to one point five percent and by October one point seven-five percent.

Well, it's on the move again. It appears Fannie Mae is telling us preemptively that the expected margin next week will raise up about one half point next week.

I won't get into a litany of reasons why the adjustable is a better all around reverse mortgage than the fixed. It is, but certain circumstances make the fixed more attractive right now.

One example is if the borrower cashes out all or the vast majority of the total a possible loan immediately.

If the lender is willing to lend $100,000, if the borrower needed all of it immediately the fixed may be a better choice. The reason is, with the new margin increase, the average 15 year interest rate for the adjustable is now higher than current fixed rate.

Right now the ARM is very attractive because it's squatting down extraordinarily low. It's teasing people, but this won't last forever and it will come up to meet the average.

Another thing is the amount of money a reverse mortgage lender would lend to a borrower using an adjustable rather than a fixed was more pronounced than it is today.

Formerly, the adjustable gave the senior much more money. No longer. It's almost a wash now. With the new higher margins the fixed might even get the borrower more than the adjustable.

We'll have to see, but the adjustable has lost a bunch of its punch.

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